Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative Payments on Securities Lending Transactions

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10041]</DEPDOC> <RIN>RIN 1545-BR20</RIN> <SUBJECT>Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative Payments on Securities Lending Transactions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations regarding the base erosion and anti-abuse tax imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The final regulations relate to how qualified derivative payments with respect to securities lending transactions are determined and reported. The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties. </SUM> <DATES> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> The final regulations are effective December 17, 2025. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 1.59A-10 and 1.6038A-2(g). </DATES> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Sheila Ramaswamy at (202) 317-6938 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains additions and amendments to 26 CFR part 1 (Income Tax Regulations) under sections 59A and 6038A of the Internal Revenue Code (Code) (“the final regulations”). The additions and amendments are issued pursuant to the express delegations of authority to the Secretary of the Treasury (or his delegate) provided under sections 59A(i) and 6038A(b)(2). The final regulations are also issued under the express delegation of authority under section 7805(a) of the Code. <HD SOURCE="HD1">Background</HD> This document contains final regulations under sections 59A and 6038A. The base erosion and anti-abuse tax (“BEAT”) of section 59A imposes on each applicable taxpayer a tax equal to the base erosion minimum tax amount for the taxable year, which is the excess of a specified percentage of the modified taxable income of the applicable taxpayer minus the applicable taxpayer's regular tax liability under section 26(b) of the Code reduced (but not below zero) by certain credits. <E T="03">See</E> section 59A(b)(1) and (2). The applicable taxpayer determines its modified taxable income by computing its taxable income without regard to any base erosion tax benefit with respect to any base erosion payment or the base erosion percentage of any net operating loss deduction allowed under section 172 of the Code for the taxable year. <E T="03">See</E> section 59A(c)(1). Generally, a base erosion payment is any deductible amount paid or accrued by an applicable taxpayer to a foreign person (as defined in section 6038A(c)(3)) that is a related party of the applicable taxpayer and the base erosion tax benefit is the deduction allowed under Chapter 1 of the Code for the taxable year for the base erosion payment. <E T="03">See</E> section 59A(d)(1), (c)(2) and (f). Qualified derivative payments (“QDPs”), as defined in section 59A(h)(2)(A), are not treated as base erosion payments if they are properly reported to the IRS. <E T="03">See</E> section 59A(h)(1) and (h)(2)(B). On January 10, 2025, the Treasury Department and the IRS published proposed regulations under sections 59A and 6038A (REG-107895-24) in the <E T="04">Federal Register</E> (90 FR 3085). The proposed regulations would address how taxpayers determine and report qualified derivative payment amounts with respect to securities lending transactions. Two comments were submitted in response to the proposed regulations, but only one of those comments addressed the proposed regulations. The Summary of Comments and Explanation of Revisions section of this preamble discusses this comment. All written comments received in response to the proposed regulations are available at <E T="03">https:www.regulations.gov</E> or upon request. A public hearing on the proposed regulations was not held because there were no requests to speak. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> Proposed § 1.59A-6(b)(3)(iii)(A) would provide that mark-to-market gains and losses from the securities leg of an intercompany securities lending transaction are not treated as QDPs. As proposed, taxpayers would not be required to include those amounts in their QDP reporting. A conforming amendment in proposed § 1.59A-3(b)(2)(iv) would provide that mark-to-market gains and losses from the securities leg of a securities lending transaction are not taken into account when determining the amount of a taxpayer's base erosion payment. Proposed § 1.59A-6(b)(3)(iv) would provide rules for determining whether a taxpayer made a substitute payment or other payment pursuant to a securities lending transaction to a foreign related party. Specifically, the rule would provide that a taxpayer may determine the amount of a substitute payment or other payment that it has paid to a foreign related party by using the amount actually paid by the taxpayer to the foreign related party if the taxpayer can specifically identify each recipient of the substitute payment or other payment. If the taxpayer cannot determine the recipient of those payments, the rule would provide a method that treats the substitute payments or other payments that a taxpayer pays with respect to borrowed securities as having been paid first to foreign related parties (but not in excess of the total amount of the payments received by the foreign related parties from all payors). The comment recommended that the final regulations provide definitions for terms used in the regulations such as “qualified derivative payment,” “substitute payment,” “other amounts that relate to the securities lending transaction,” “mark-to-market gains and losses,” “securities leg of a securities lending transaction,” and “cash collateral” to reduce ambiguity. The comment asserted that the ambiguity could potentially lead to substitute payments being misclassified as QDPs rather than base erosion payments. The comment also requested additional examples illustrating the classification of substitute payments. In response to this comment, the final regulations include cross-references to §§ 1.861-2(a)(7) and 1.861-3(a)(6) to clarify the meaning of the term “substitute payment.” Although proposed § 1.59A-3(b)(2)(iv)(B) indicates by exclusion that “other amounts that relate to the securities lending transaction” refers to payments relating to the transaction other than mark-to-market gains or losses and the delivery of securities to or receipt of securities from the lender, greater clarity that substitute payments and borrow fees are included in this term may be helpful. Therefore, for consistency purposes, §§ 1.59A-3(b)(2)(iv)(B) and 1.59A-6(b)(3)(iii) of the final regulations have been modified to use the term “items of income, gain, loss, or deduction during the taxable year” and explain that this term refers to amounts such as substitute payments and borrow fees that relate to the securities lending transaction and does not include the delivery or receipt of securities. The final regulations also clarify that the term “mark-to-market gains and losses” with respect to a securities lending transaction refers to the recognition of gain or loss on the transaction as if the taxpayer's position in the securities lending position were sold for its fair market value on the last business day of the taxable year, as described in § 1.59A-6(b)(1)(i). Proposed § 1.59A-6(b)(3)(iii) would provide cross-references to §§ 1.861-2(a)(7) and 1.861-3(a)(6) for the definition of a “securities lending transaction.” Sections 1.861-2(a)(7) and 1.861-3(a)(6) define the term “securities lending transaction” as “a transfer of one or more securities that is described in section 1058(a) or a substantially similar transaction.” These cross-references were intended to indicate that “securities leg of a securities lending transaction” refers to the components of the transaction that relate to the transfer of a security. The final regulations have been modified to clarify that the securities leg of a securities lending transaction refers to the rights, obligations, and transfers of securities and payments under the transaction other than the obligation to provide or right to receive cash collateral and interest (sometimes referred to as rebate) thereon. Some of the terms cited by the comment are already defined in other parts of the regulations or are commonly understood industry terms. For example, the term “qualified derivative payment” is defined in section 59A(h)(2)(A) and § 1.59A-6(b); therefore, no additional definition is required. Additionally, “cash collateral” is a commonly understood industry term that does not require a definition and is already used in the existing regulations at § 1.59A-6(d)(2)(iii)(B). The final regulations do not adopt the comment to include examples illustrating the classification of substitute payments. The Treasury Department and IRS are of the view that additional examples would not add clarity because the final regulations now cross-reference regulations illustrating the meaning of a substitute payment, and the examples in proposed § 1.59A-6(b)(3)(iii)(B) clearly indicate the types of payments that are referenced by the term “substitute payment.” The final regulations also make clarifying edits to the specific identification method in proposed § 1.59A-6(b)(3)(iv)(B). As noted previously, the proposed regulations would have provided that a taxpayer may determine the amount of substitute payments or other payments with respect to the securities leg of a securities lending transacti ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 36k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━